India IRS Review
Swaps up to 1-year fall on 50 bps rate cut by MPC
This story was originally published at 18:51 IST on 6 June 2025
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By Srijita Bose
MUMBAI – Rates on overnight indexed swaps maturing in up to one year fell Friday after the Reserve Bank of India's Monetary Policy Committee slashed the repo rate by 50 basis points. Rates on swaps maturing in over one year, however, rose as the rate-setting panel changed its policy stance to "neutral" from "accommodative", dashing traders' hopes of further rate cuts in 2025, dealers said.
The one-year swap rate ended at 5.48%, the lowest since May 2, 2022, against 5.53% Thursday. The five-year swap rate ended at 5.68%, up from 5.60% Thursday. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 1.07 trillion, sharply up from INR 616.80 billion Thursday.
All short-term swap rates fell tracking the fall in overnight Mumbai Interbank Offered Rate--the floating leg in an OIS contract--after the rate-setting panel adjusted the repo rate to 5.50%. Further, a cut in the cash reserve ratio by 100 bps to 3.00% of banks' net demand and time liabilities, starting September, which will infuse liquidity of INR 2.50 trillion into the banking system, pulled rates in the shorter-tenure contracts down, dealers said.
"The fall in short-term (OIS) was because of the lower MIBOR fixing," a dealer at a private-sector bank said. "But on the whole, we have possibly come towards the end of the rate-cut cycle, which is leading to the upward sloping in the curve."
Most traders had expected rate cuts adding up to 100 bps by the end of 2025, from the start of the cycle in February. With Friday's rate cut, the RBI has already delivered upon this expectation, but the change in stance to 'neutral' has erased chances of further cuts, dealers said. Traders now widely expect the terminal repo rate to stay at 5.50%. Some fears of a possible rate increase in the future also limited the fall in shorter-tenure swaps while leading to a rise in longer-term contracts, dealers said.
A rise in government bond yields also led swaps above one year to rise, dealers said. The yield spread on the five-year benchmark over the five-year swap is at 14 bps, from 24 bps Thursday. However, some traders paid fixed rates on the five-year swap while buying the five-year bond as they expect the yield spread to widen from the current level, dealers said.
Offshore traders, including those from foreign banks, are likely to have paid fixed rates on the two- and five-year swaps, dealers said. Caution ahead of the release of US non-farm payrolls data for May also led traders to pay fixed rates, they said. "Everything will depend on the growth numbers now, but for now the play on rates seems to be over," a dealer at another private-sector bank said.
OUTLOOK
Swaps are not traded Saturday. Monday, swaps will take cues from the movement of US Treasury yields after the release of jobs data Friday, dealers said. Swaps may resist falling sharply further as market hopes of further rate cuts in 2025 were dashed after the rate-setting panel changed the stance to 'neutral' from 'accommodative', they said.
May non-farm payrolls data showed that the US added 139,000 jobs in May, beating estimates. The jobs added during the month were less than 147,000 a month ago.
Traders will also track the movement of the overnight MIBOR for direction on short-term swap rates. Shorter-tenure swaps maturing up to one year could fall further on expectations of a further boost in liquidity with the cut in CRR. However, longer-tenure swaps may track the movement of government bonds, dealers said.
The one-year swap rate is seen in a range of 5.40-5.55% Monday. The five-year contract is seen at 5.51-5.75%.
At 1700 IST | THURSDAY | |
1-year OIS | 5.48% | 5.53% |
2-year OIS | 5.44% | 5.41% |
5-year OIS | 5.68% | 5.60% |
2-year MIFOR | 5.90-6.02% | 5.91-6.03% |
5-year MIFOR | 6.18-6.30% | 6.14-6.26% |
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Rajeev Pai
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